China has emerged as the most direct competitor of United States in the 21st century. The Chinese economy is poised to replace the United States as the leading economy of the world. Therefore United States is watching China with great interest. Analysts in United States have concluded that China’s economic rise could upset the U.S. led world order, established after World War II.
On June 27, President Donald Trump released a statement in which he declared that he will not put in place across the board rules blocking Chinese investments in U.S. technology companies.
However on May 29, in a statement President Trump promised to “implement specific investment restrictions” forbidding Chinese companies from acquiring “industrially significant technology”.
Furthermore, President Trump endorsed legislation which will expand the authority of Committee of Foreign Investment or CFIUS, as the Treasury led body is known, empowering it further to block the acquisition of certain U.S businesses by foreign parties.
These actions have not come as a surprise to analysts who have been following the relationship between the two countries. Recently, telecom companies across the United States stopped selling phones made by Chinese companies. These steps were taken due to the pressure applied by the U.S. government, which cited national security as the reason.
All these decisions have been driven by the fact that China is trying to move up the value chain. As the Chinese economy has grown, its leadership has become more aspirational when it comes to the kind of products China makes. This transition of the Chinese economy directly threatens the economies of U.S. led western order. Tensions related to South China Sea and the fact that U.S. doesn’t see China as a responsible world power also don’t help.
China is watching the actions of United States very closely, “China will closely monitor the legislation process and evaluate its potential impact on Chinese companies,” Commerce Ministry spokesman Gao Feng said on Thursday in Beijing to reporters. “China does not agree with tightening foreign-investment conditions using national security as reasons.”
It is interesting to note that the official reaction was very mild, which is in contrast to the usually bellicose statements issued by Chinese officials. Clearly China is relieved that President Trump hasn’t acted on an executive level.
President Trump is determined to stop China from acquiring certain technologies which he described as America’s “crown jewels,”. Reading between the lines, it has become the obvious that United States and China are entangled in a technology war, rather than a trade one. At Aspioneer, we believe the same.
While China is an extremely powerful economy, the reality is that it is not in a position to prevail over the U.S. and it’s allies.
The House of Representatives is certainly determined. It recently approved the Foreign Investment Risk Review Modernization Act by a 400–2 margin. This bill, like a Senate version passed earlier, gives CFIUS the ability to look at and stop a broader range of transactions. The two bills are now headed towards reconciliation.
Empowered by this legislation, CFIUS will have powers to create a category of “countries of special concern”, and there is no country that concerns United States than China. Xi Jinping, the Chinese president wants China to be world leader in technology and does not feel constrained by China’s WTO obligations.
The Made in China 2025 initiative, announced in 2015, aims to make China world leader in industries like aerospace, robotics, electric cars, semiconductors and wireless technologies. Under this plan China aims to provide to homegrown companies assistance in form of foreign acquisitions.
The closed nature of China’s economy will allow Chinese companies to grow big without facing competition. This will allow Chinese companies to compete on a global level without facing domestic competition. Made in China 2025, therefore directly threatens U.S. technological leadership.
The Dragon has realized that it has poked the American Eagle a little too much this time. Hong Kong’s South China Morning Post reports that the Chinese central government has “instructed Chinese state media agencies to avoid mentioning Made in China 2025 in their reports.” Chinese officials have recently begun downplaying Made in China 2025.
This doesn’t mean China is getting rid of Made in China 2025. While Xi might think that China can beat the United States at technological leadership, some Chinese academics think that China has become overconfident. Liu Yadong, editor-in-chief of Science and Technology Daily, recently made news when he proclaimed that Chinese leaders have been “hoodwinked” into believing that China can dominate America in the field of technology.
Hardcore mode: ON!
At Aspioneer, we believe U.S. restrictions will severely impact China. United States will simply not allow China to bypass the carefully nurtured system of internationally recognized intellectual property rights. Contrary to what anyone thinks, United States will not give up its leadership over game changing technologies without a fight.
Another spanner in the works are the tariffs announced by President Trump under Section 301 of the Trade Act of 1974, for the theft of intellectual property. Chinese company law mandates that foreign firms release their technology in exchange of market access to the world’s largest consumer market. This loss of technology amounts to hundreds of billions of dollars of lost royalties every year.
The tariffs, which went live on July 6 have made Chinese leadership extremely angry. They see it as an attempt to stop the national rejuvenation of their country. As President Xi told the Global CEO Council, a grouping of foreign business leaders, in Beijing, “In the West, you have the notion that if somebody hits you on the left cheek, you turn the other cheek. In our culture, we punch back!”
“China is not going to yield to outside pressure and eat the bitter fruit,” a senior Chinese official told the Wall Street Journal. “That’s the negotiation principle set by President Xi.”
President Xi’s punch remark has been interpreted as threat to go after American companies operating in China. On the other hand his remarks can also be interpreted as his way to protect the national pride of China. This is no different from President Trump’s “America first” slogan, which describes his interest to make sure America’s hegemony remains unchallenged for years to come. Whatever may be the interpretation, not all Chinese officials are onboard this course of action. “A big worry for China is that foreign investors are opting to leave the country,” a Chinese government source told the South China Morning Post. “The option of targeting U.S. firms in China has never been on the cards”.
It is also not a good time to take this course of action. The U.S. economy is vibrant while China is slowing down. Furthermore, the Chinese economy is heavily dependent on the United States for its revenue. Approximately 88 percent of Chinese exports go to America.
We think China shouldn’t retaliate in response to U.S. sanctions. China also shouldn’t confront any other country over trade either. China’s economy is not in a good shape. Renminbi is depreciating against the dollar, while the Shanghai Composite, China’s equity market index is the world’s worst performing stock index this year. Even worse is the rapid accumulation of debt by Chinese state-owned enterprises. China’s debt is now almost one-and-a-half times the nominal GDP of the country.
It is due to these reasons that we think it is not a good idea to spark a trade war with America. China’s economy is not in position to take on America. President Trump and the political establishment of the United States can be counted upon to decry any retaliation against U.S. companies as an attack on America itself. We don’t think it is a good idea to challenge United States, especially when an extremely nationalistic President is at the helm of the most powerful country in the world.
Our advice to China, “Stay low and wait for this to blow over”.